ARM loses money but expects server sales to make up for slowing growth

"High-end smartphone" growth slows, but loss may be a one-time thing.

ARM Holdings reported a loss in the fourth quarter of 2013, and it said sales of chips for "high-end smartphones" have slowed down.

But that doesn't mean the losses will continue. Sales growth of entry-level smartphone chips increased, as did sales growth for microcontrollers and smart sensors. Additionally, ARM says its nascent presence in the server market is bound to grow.

ARM's revenue improved from £164.2 million to £189.1 million year-over-year, but a one-time charge of £59.5 million combined with its usual expenses was enough to give the company a quarterly loss of £6.2 million compared to a profit of £42.5 million in Q4 2012. The loss of £6.2 million is equivalent to $10.1 million.

The one-time charge relates to ARM's involvement in a company called Bridge Crossing (BC), which was formed by a consortium of tech firms to acquire rights to MIPS Technologies patents.

"In Q4 2013, BC made a strategic decision not to pursue a licensing program," ARM wrote in today's earnings announcement. "As ARM believes that there is significant longterm strategic advantage in owning this intellectual property, the Patents were purchased outright in Q1 2014 for $4m (£2.5m). The patents acquired (approximately 500, granted and pending) are now part of ARM’s portfolio of more than 3,500 patents. As ARM now owns the Patents, there is no future cash to be received from BC, so the available‐for‐sale financial asset has been impaired, giving rise to a non‐cash exceptional charge of £59.5 million."

Further Reading

"Server Base System Architecture" defines the building blocks of an ARM server.

Even though that charge accounts for the quarterly loss, ARM's business is still going through some growing pains.

“ARM is heading into a period of slowing royalty growth due to the ongoing slowdown in the smartphone and tablet markets, particularly at the high end,” Janardan Menon, a technology analyst at Liberum Capital, said in a research note quoted by the New York Times.

ARM said its full-year "processor royalty revenue grew faster than the overall semiconductor industry by 18 percentage points," but that "the degree of outperformance was impacted by slower sales of chips for high-end smartphones in the second half of the year."

Despite what ARM called "slower growth in one end market," the company said it believes processor royalty revenue in 2014 will "grow at a similar rate to that reported over the last three years." That's because other chip markets are expected to increase.

"After a strong licensing performance in 2013 which saw ARM make good progress across its established markets as well as making significant in-roads in servers and smart embedded applications, we enter 2014 with a strong opening order backlog and a healthy pipeline of licensing opportunities," ARM said.

ARM noted that during the quarter AMD "announced the imminent sampling of its low‐power server SOCs, based on Cortex‐A57." Separately, ARM said that "momentum continues in computing, servers, and networking applications with the signing of an ARMv8 architecture license and two ARMv8 processor licenses."

In the quarter, ARM signed processor licenses of all types with 22 companies, more than half of which were first-time customers. "Many of these new customers are planning to use ARM technology in emerging applications such as healthcare, Internet of Things, and wearable digital devices," the company said.

"ARM's strategy is for our technology to continue to gain in long-term growth markets, such as smartphones, tablets, enterprise equipment, and embedded computing, and to increase the royalty percentage ARM receives from each device," CEO Simon Segars said.

I still don't quite understand the loss. Surely the ownership of the patents cancels out the loss of the saleable asset?

There's not enough information in this summary article to really see exactly what happened, but buying the patents probably sets a value on the patents signficantly below ARM's investment in BC. The difference is what's being written off.

Basically, BC was a failed investment and the other partners were willing to let ARM buy the patents. But ARM still takes a write-off because the value of the patents is way below what they originally invested in BC.

I wonder how much the weak highend smartphone/table revenue has to do with the relative weakness of the A15 core compared to the Krait cores from Qualcom. I believe their per chip revenue is lower from Architectural licenses than from a fully licensed design. The a15 just wasn't as good on a performance per watt perspective and it's power target was a little high.

I wonder how much the weak highend smartphone/table revenue has to do with the relative weakness of the A15 core compared to the Krait cores from Qualcom. I believe their per chip revenue is lower from Architectural licenses than from a fully licensed design. The a15 just wasn't as good on a performance per watt perspective and it's power target was a little high.

Participating in a high-stakes CPU arms-race (ha!) isn't something ARM has historically done. They weren't staffed up for it, and perhaps they just aren't big enough revenue-wise to compete in that arena.

A surprising change for ARM, but more or less they have one of the most solid footings out there. They generally don't make any of the chips. They are a R&D organization with a huge licensing group. They don't have to make multi-billion dollar FAB investments. It does mean this miss out on a lot of the profits, but it also means they generally don't have to deal with much in terms of losses when various bubbles burst.

A surprising change for ARM, but more or less they have one of the most solid footings out there. They generally don't make any of the chips. They are a R&D organization with a huge licensing group. They don't have to make multi-billion dollar FAB investments. It does mean this miss out on a lot of the profits, but it also means they generally don't have to deal with much in terms of losses when various bubbles burst.

The potential downside of ARM's strategy is that they may end up commoditizing the CPU/SoC market into race-to-the-bottom profit oblivion. I'm not saying we're there yet, but I wonder how long it will be before vendors start complaining about paying ARM royalties and look to move to a more open architecture or even something developed in-house. Even very reasonable royalties and licensing fees can be a big deal when you've driven margins down to nothing.

Presumably they are licensing ARM because it is cheaper than designing in house, right? Seems more likely to me that ARM's later generations will be eaten up by an even worse performing/cheaper alternative, or even their own older designs.

A surprising change for ARM, but more or less they have one of the most solid footings out there. They generally don't make any of the chips. They are a R&D organization with a huge licensing group. They don't have to make multi-billion dollar FAB investments. It does mean this miss out on a lot of the profits, but it also means they generally don't have to deal with much in terms of losses when various bubbles burst.

The potential downside of ARM's strategy is that they may end up commoditizing the CPU/SoC market into race-to-the-bottom profit oblivion. I'm not saying we're there yet, but I wonder how long it will be before vendors start complaining about paying ARM royalties and look to move to a more open architecture or even something developed in-house. Even very reasonable royalties and licensing fees can be a big deal when you've driven margins down to nothing.

As long as I can buy me some sweet love in the form of ARM Cortex M0/M3 highly integrated SoC microcontrollers for $1.5, I am a very happy camper.

A surprising change for ARM, but more or less they have one of the most solid footings out there. They generally don't make any of the chips. They are a R&D organization with a huge licensing group. They don't have to make multi-billion dollar FAB investments. It does mean this miss out on a lot of the profits, but it also means they generally don't have to deal with much in terms of losses when various bubbles burst.

The potential downside of ARM's strategy is that they may end up commoditizing the CPU/SoC market into race-to-the-bottom profit oblivion. I'm not saying we're there yet, but I wonder how long it will be before vendors start complaining about paying ARM royalties and look to move to a more open architecture or even something developed in-house. Even very reasonable royalties and licensing fees can be a big deal when you've driven margins down to nothing.

Problem is its almost impossible at the moment to make an open license chip(soc) thats competitive using modern technologies.

The other problem is the cpu core may be open source but you need all the other blocks to build a soc

eg the Leon series (sparc v8) or the openrisc 1000 series

Also the tool chain for asic productions aren't open source and aren't cheap.

I think Metaluna's point was not about using an open source design, but about using an ISA and internal interface which is royalty free, instead of paying ARM for the right to implement the ARM ISA spec and, maybe, the AMBA spec.

Note that although some (Samsung) are just using ARMs designs, others (Apple, NVDIA and Qualcomm) are designing their own µarchs, which just implement the ARM spec.

In theory, these 3 companies could get together and design a new ISA and maybe a new peripheral interface, publish it and let anyone with deep enough pockets implement it royalty free.

On the other end, I doubt ARMs architectural licence royalties are so heavy anyone would consider this option.

A new isa is simple and not that hard to do, its done a lot in more than a few computer architecture courses

whats hard/expensive is all the tools to support it and qualifying/validating your new core that uses it as well as getting it to market in a cost effective manner in a reasonable time period.

Thats why the companies you mention use the arch license and just modify the bits they need (the core, memory interfaces etc and a few files in the tool chains). Its a lot easier/hell of a lot more cost effective than going from scratch.

Plus there are only so many ways you can implement a risc core with L1 ,L2 using the standardised bus typesto plugin your other ip/peripheral blocks.Though lots of ways to tune to try and achieve the performance/features/power use you want/need

Using an open interface means you'd have to design your own peripheral blocks(i/o,gpu,network,wifi ,bt ,radio, etc) and/or open bus as you won't be able to buy peripheral blocks to plugin into it until its been out a while.

A surprising change for ARM, but more or less they have one of the most solid footings out there. They generally don't make any of the chips. They are a R&D organization with a huge licensing group. They don't have to make multi-billion dollar FAB investments. It does mean this miss out on a lot of the profits, but it also means they generally don't have to deal with much in terms of losses when various bubbles burst.

The potential downside of ARM's strategy is that they may end up commoditizing the CPU/SoC market into race-to-the-bottom profit oblivion. I'm not saying we're there yet, but I wonder how long it will be before vendors start complaining about paying ARM royalties and look to move to a more open architecture or even something developed in-house. Even very reasonable royalties and licensing fees can be a big deal when you've driven margins down to nothing.

This is already possible to some extent with MIPS (the original MIPS ISA -- a subset of the newer ISA -- is already patent-free and MIPS64 is becoming patent-free in just a couple years). I believe that MIPS will see a large rise in popularity due to China pushing it rather hard via its Loongson processors. Imagination Technologies (the makers of the SGX graphics in most mobile chips) has also bet heavily on MIPS by purchasing the company and has announced a new MIPS design sporting the highest coremark score of ANY processor. Broadcom also purchased a permanent license of all MIPS IP.

There's also the fact that MIPS is the only ISA that has proven itself in everything from microcontrollers (eg. pic32), mobile devices, and high-performance. Look at the Broadcom MIPS64 chips that are 20-core 80-thread (what Intel calls "hyperthreading", but a more sophisticated version indicative of how wide the execution of each core is) with per-core power gating, 12MB cache, 1.28Tbps throughput, quad DDR3, 4-socket configuration, and 5 billion transistors at 28nm (I don't know the TDP nor speed, but the 2009 8-core version was about 1.2GHz and 49W at 40nm -- a bulk process -- with a 2.0GHz version that likely had around 80W TDP).

ARM is an architecture and licensing firm. That is all. They produce no actual products. Their entire revenue stream is from architecture licenses (one time fees) or design licenses (ongoing royalty payments). The one time charge had no back up revenue stream to offset it (as yet), thus the write off. If it pays off long term it will be in two areas, incorporating the patents into future ARM designs or Patent Trolling those they feel are in violation of their portfolio.

They are a small company making small profits based on low power designs. apple has an architecture license, as does Intel and probably Samsung. AMD has a design license that will pay fees if it is successful. High end smart phones are increasingly using architecture level licenses which are one time only. Meaning the increased sales of apple and Samsung don't pay ARM another nickel.

It is more interesting that they are considering increasing the notoriously cheap ARM royalties (< a dime) to strengthen the company's future.

ARM is an architecture and licensing firm. That is all. They produce no actual products. Their entire revenue stream is from architecture licenses (one time fees) or design licenses (ongoing royalty payments). The one time charge had no back up revenue stream to offset it (as yet), thus the write off. If it pays off long term it will be in two areas, incorporating the patents into future ARM designs or Patent Trolling those they feel are in violation of their portfolio.

They are a small company making small profits based on low power designs. apple has an architecture license, as does Intel and probably Samsung. AMD has a design license that will pay fees if it is successful. High end smart phones are increasingly using architecture level licenses which are one time only. Meaning the increased sales of apple and Samsung don't pay ARM another nickel.

It is more interesting that they are considering increasing the notoriously cheap ARM royalties (< a dime) to strengthen the company's future.

I don't believe Samsung has an arch license. Intel does, but they're not doing anything (public) with it. Anyone know if a list of exists of the ARM architecture licensees?

A new isa is simple and not that hard to do, its done a lot in more than a few computer architecture courses

whats hard/expensive is all the tools to support it and qualifying/validating your new core that uses it as well as getting it to market in a cost effective manner in a reasonable time period.

Thats why the companies you mention use the arch license and just modify the bits they need (the core, memory interfaces etc and a few files in the tool chains). Its a lot easier/hell of a lot more cost effective than going from scratch.

Plus there are only so many ways you can implement a risc core with L1 ,L2 using the standardised bus typesto plugin your other ip/peripheral blocks.Though lots of ways to tune to try and achieve the performance/features/power use you want/need

Using an open interface means you'd have to design your own peripheral blocks(i/o,gpu,network,wifi ,bt ,radio, etc) and/or open bus as you won't be able to buy peripheral blocks to plugin into it until its been out a while.

I'm afraid you're mixing core licenses and architectural licenses.

You can go to ARM Ltd and buy CPU core design (eg M4, A7, A15, etc). Then you go shop around and buy a GPU design, a memory controller design, etc that is compatible with whatever bus ARM Ltd used in that core and then you stitch together your SoC.This is what most people do. Samsung does it, Apple did it for most of the iPhone and iPads.

Or, you can go to ARM Ltd and buy an architectural license, the right to design from scratch a CPU that knows how to interpret ARM (eg, AArch32) instructionsThis, of course, requires a much bigger investment in design and validation on your part.But it's not only doable, it's been done for a while. NVIDIA and Qualcomm have been doing it for a while. Apple has switched over to do that for their latest chips.

Some people have speculated that, at their volumes, it's cheaper to buy the architectural license and implement your own design than to pay royalties on ARM's core designs.

The only thing between these companies and a license free ISA is the ARM software ecosystem. But then again, an ARM architectural license is probably cheap enough it's not worth the effort.

I still don't quite understand the loss. Surely the ownership of the patents cancels out the loss of the saleable asset?

The original patents were purchased by Bridge Crossing for $350m, with a ~48% share from ARM (they paid $167.5m into the consortium).

ARM were able to buy the patents outright for $4m from Bridge Crossing. Now, this likely included some kind of licensing deal with the other owners of Bridge Crossing and other considerations, but essentially they gave up their $182.5m investment for $4m. That suggests that they were massively overvalued.

When that happens under IFRS (which I'm fairly certain ARM report under), that there's an indication that an asset is overvalued you need to revalue it, you can't just say "well, we paid $167.5m for the share of the co, $4m to buy out the others, so these patents cost us $171.5m". You need to look at a fair market value. Whereas before it was an investment in Bridge Crossing carried at cost, which is easier to leave as is (especially as there was always the chance of future returns from it).

A new isa is simple and not that hard to do, its done a lot in more than a few computer architecture courses

whats hard/expensive is all the tools to support it and qualifying/validating your new core that uses it as well as getting it to market in a cost effective manner in a reasonable time period.

Thats why the companies you mention use the arch license and just modify the bits they need (the core, memory interfaces etc and a few files in the tool chains). Its a lot easier/hell of a lot more cost effective than going from scratch.

Plus there are only so many ways you can implement a risc core with L1 ,L2 using the standardised bus typesto plugin your other ip/peripheral blocks.Though lots of ways to tune to try and achieve the performance/features/power use you want/need

Using an open interface means you'd have to design your own peripheral blocks(i/o,gpu,network,wifi ,bt ,radio, etc) and/or open bus as you won't be able to buy peripheral blocks to plugin into it until its been out a while.

I'm afraid you're mixing core licenses and architectural licenses.

You can go to ARM Ltd and buy CPU core design (eg M4, A7, A15, etc). Then you go shop around and buy a GPU design, a memory controller design, etc that is compatible with whatever bus ARM Ltd used in that core and then you stitch together your SoC.This is what most people do. Samsung does it, Apple did it for most of the iPhone and iPads.

Or, you can go to ARM Ltd and buy an architectural license, the right to design from scratch a CPU that knows how to interpret ARM (eg, AArch32) instructionsThis, of course, requires a much bigger investment in design and validation on your part.But it's not only doable, it's been done for a while. NVIDIA and Qualcomm have been doing it for a while. Apple has switched over to do that for their latest chips.

Some people have speculated that, at their volumes, it's cheaper to buy the architectural license and implement your own design than to pay royalties on ARM's core designs.

The only thing between these companies and a license free ISA is the ARM software ecosystem. But then again, an ARM architectural license is probably cheap enough it's not worth the effort.

No I didn't mix them up. Maybe I wasn't clear enough

By scratch I was referring to making your own isa (not arm based) and using that in a soc and having to come up with your own port of gcc

This is my problem with our whole system: companies "aren't doing well" if their growth isn't large enough. To me a successful system would be one where a company is doing well if they're still making money. A little growth, or flat growth, fine, as long as they're not losing money. If you're only considered "doing well" if you grow 20% every year (random number) then you're going to slow down at some point. It just will happen. Our system is set up for eventual failure for every company, instead of being geared towards lasting longer.

This is my problem with our whole system: companies "aren't doing well" if their growth isn't large enough. To me a successful system would be one where a company is doing well if they're still making money. A little growth, or flat growth, fine, as long as they're not losing money. If you're only considered "doing well" if you grow 20% every year (random number) then you're going to slow down at some point. It just will happen. Our system is set up for eventual failure for every company, instead of being geared towards lasting longer.

Wall Street doesn't give a rip about eventual failure. They want their golden parachutes, big fat bonuses, and great returns in the next quarter. Anything beyond that is irrelevant, and counterproductive as far as they are concerned. What are you? Some kind of Commie Pinko?